At each enterprise, such a management tool as budgeting of income and expenses (hereinafter referred to as “BDR”) should be actively used. What it is? Let's try to understand this article.
Key Definitions
Each business entity is characterized by its own BDR system, depending on the choice of financial planning strategy, as well as on the goals set. Therefore, when defining the BDR, what it is and what its purpose is, it is necessary to understand the fact that as a management technology in any company, it is aimed at achieving its own goals and using its own tools and tools.
Budgets are prepared both for the company as a whole and for its individual divisions. Budgeting of revenues and expenses is a work plan coordinated across all structural units, which combines individual budgets and is characterized by an information flow for making management decisions in the field of financial planning. This budget considers, in aggregate terms, planned earnings and cash flows. Thus, answering the question of what the BDR is - what is it, it can be argued that this is the result of many discussions, as well as decision-making in the future about the fate of the enterprise, which contributes to its effective operational and financial management.
The calculations that are carried out in the formation of the budget, allow you to timely and fully determine the amount of money needed to implement the decisions made. In this case, we are talking about the formation of sources of these funds (for example, borrowed or own).
Assessment of the effectiveness of BDR
What kind of concept this is, and how it can be evaluated, can be judged only in the breaded period. So, the effect on the development of the budget depends on how much the degree of flexibility of the business entity is manifested, thanks to the prediction of the results of managerial actions. Financial planning and budgeting provides for the definition of basic settings for each individual direction of the subject, as well as the calculation of various options with the preparation of responses to possible changes in the internal and external environment.
Budget Functions
These functions depend on the phase of formation of the BDR and its implementation. At the very beginning of the reporting period, this financial document is a plan of sales, expenses and other financial transactions in the coming year. By the end of the reporting period, he already plays the role of an appraiser (meter), with the help of which it becomes possible to compare actual and planned indicators for making adjustments to the subsequent activities of the enterprise.
The functions of the BDSDS and BDR are similar and can be represented by the following list:
- analytical (strategy correction, rethinking of the idea, setting new goals and analysis of alternatives);
- financial planning;
- financial accounting (it is necessary to think over and take into account already completed actions in the previous period for making the right decisions in the future);
- financial control (comparison of tasks and results obtained, identification of strengths and weaknesses);
- motivational (comprehension of the formed plan, punishment in case of failure to fulfill it and encouragement when fulfilling and overfulfilling it);
- coordination;
- communication (coordination of planned indicators of structural units of the enterprise, finding compromises and securing responsible executors for one or another point of the plan).
Comparison of BDS and BDR
BDR (income and expense budget), as well as BDS (cash flow budget) are the main financial documents that must be presented, for example, to a banking institution upon receipt of a loan. However, there is some difference between these two concepts:
- BDDS uses the cash method, BDR - the accrual method;
- BDR is a net profit planning, and cash flows are planned using BDS;
- the BDR reflects digital material without such indirect taxes as VAT and excise taxes, and in the BDS all indicators are indicated taking into account these taxes;
- these two documents have differences in structure: in the BDR there are articles related to depreciation and revaluation, and in the BDS there are articles on the receipt and repayment of borrowed funds;
- and, of course, the discrepancies in the purpose of these documents: the BDR is used to calculate the planned cost, profitability, revenue and profit, and the BDS is needed to track cash flows at the cash desk and settlement accounts of the enterprise.
The main stages of budgeting at the enterprise
The first stage is the formation of a financial structure and is aimed at developing a model of such a structure that would establish the responsibility for the execution of the budget itself, as well as control over the sources of income and expenses.
The second stage involves the formation of a budget structure and is defined as a general scheme of the consolidated budget of a business entity. At this stage, special attention should be paid to the budget items of the enterprise.
According to the results of the implementation of the third stage, the formation of the accounting and financial policy of the enterprise. In other words, a set of rules for conducting accounting, operational and production accounting is created taking into account the restrictions adopted in the preparation of the budget and monitoring its implementation.
The fourth stage is associated with the development of the procedure and procedures for monitoring, planning and analysis, in case of occurrence - the reasons for its failure.
And, finally, the fifth stage is already connected with the direct implementation of the budgeting system. It includes work, the implementation of which is associated with the preparation of financial and operational budgets for the coming period, conducting an appropriate analysis, based on the results of which some adjustments to budgets can often be made. As a result, the income and expenses of the enterprise in the required amounts should be phased out.
Three approaches to the budgeting process
In modern literature, there are three approaches that are used to formulate BDR articles:
- "upwards";
- "top down";
- combined.
The first approach is used at large enterprises where the heads of structural divisions draw up the budgets of departments or sections, which are subsequently reduced to the budgets of the workshop or the plant as a whole. A prerequisite for the organization of budget formation is the coordination of mid-level managers with the senior management of the company.
An example of the BDR of the second approach shows that the budgeting process is carried out by senior management, and managers of lower-level departments are involved minimally.
The third approach is the most balanced and helps to avoid the negative consequences of the two previous approaches.
The advantages of budgeting
Like any economic phenomenon, budgeting has both positive and negative sides. The advantages include:
- promotes motivation and a positive attitude of the team;
- coordinates the work of the team as a whole;
- thanks to regular analysis, it allows you to adjust the budget on time;
- It is a tool for comparing planned and actual results.
Disadvantages of budgeting
Among the main disadvantages, it is necessary to highlight the following:
- discrepancies in the perception of budgets among different people;
- the high cost and complexity of the budgeting process;
- lack of budget motivation if it is not communicated to all employees.